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The goal of business strategy is clear-to invest capital in a way that maximizes shareholder value. But defining the actions that will accomplish this goal is complex. Financial tools to guide the process generally focus on cash flow projections to value strategies relative to required investment in physical capital. For decades, these tools have provided useful guidance for decision making, albeit relying on numerous assumptions on risk and return.
Management information today is, however, at odds with the data and tools needed to drive superior decisions. Most management teams are not short on ideas or the ability to source capital to support business strategies. What is missing is a clear understanding of how to execute a strategy successfully. Success depends on the skills and motivation of employees who assume responsibility for taking a strategy to fruition. Access to intellectual and operational know-how, customer and supplier relationships, a committed workforce, and other such intangibles critical to success is ultimately a function of a firm's investment in such capital-in other words, human capital.
Traditional capital budgeting and financial planning frameworks offer very little to guide human capital investment decisions; yet payroll and benefits typically constitute 30%-70%1 of operating expenses, with training, recruiting, and other such expenses adding substantially to this cost. In spite of the magnitude of these investments, most companies are without a compass when it comes to people issues. Decisions are usually based on opinion or benchmark surveys rather than data or predictive analytics linked to business results. For example, there is little in place to guide management on how to engage pivotal employees at all levels of the organization, what drives them and what doesn't, and the "flight risk" of such talent. Most firms lack a basis for structuring or prioritizing human capital investments, and a concrete notion of what return on investment is generated over time. |
